Yahoo Finance W.W. Grainger, Inc. (NYSE:GWW) Q1 2024 Earnings Call Transcript
W.W. Grainger, Inc. (NYSE:GWW) Q1 2024 Earnings Call Transcript April 25, 2024
W.W. Grainger, Inc. reports earnings inline with expectations. Reported EPS is $9.62 EPS, expectations were $9.62. W.W. Grainger, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to W.W. Grainger First Quarter 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Kyle Bland, Vice President, Investor Relations. Thank you. You may begin.
Kyle Bland: Good morning. Welcome to Grainger’s first quarter earnings call. With me are D. G. Macpherson, Chairman and CEO; and Dee Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company’s most recent Form 8-K and other periodic reports filed with the SEC. This morning’s call will focus on results for the first quarter of 2024, which are consistent on both a reported and adjusted basis. As a reminder, we have included a daily organic constant currency sales growth metric within these materials to normalize for the divestiture of our E&R Industrial Sales subsidiary, which was sold at the end of 2023.
Definitions and full reconciliations of this and any other non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release. Both of which are available on our IR website. We will also share results related to MonotaRO. Please remember that MonotaRO was a public company and follows Japanese GAAP, which differs from U.S. GAAP and is reported in our results 1 month in arrears. As a result, the numbers disclosed will differ from MonotaRO’s public statements. With that, I will turn it over to D.G.
Donald Macpherson: Thanks, Kyle. Good morning and thanks for joining the call. 2024 started well. As we remain grounded in the Grainger Edge, we are focused on starting with the customer and staying focused on what matters most. I’ve seen this play out in several ways throughout the quarter. In February, we hosted the Grainger Show in Orlando, where over 10,000 of our customers, suppliers and team members came together to showcase the products and solutions that Grainger offers. It remains a great opportunity to work together with our partners to solve customer problems. We have received great feedback on progress since the event. I have also had the opportunity to meet with a diverse set of customers from many industries.
It has been great to see how the Grainger team continues to deliver value and further embed into our customers’ operations. During a recent visit to a musical instrument manufacturer, I had the chance to see how our team partnered with the customer to help them standardize their product portfolio to lower cost and improve efficiency. This included leveraging our strong supplier relationships and expanding our KeepStock solution to ensure they have the right products in the right locations. I also spent time with a large public health system, which is in the process of building a new hospital. Throughout the project, we supported their operations as they transition to the new facility, ensuring products remain readily accessible across the campus.
By supporting this customer throughout the significant change, we deepened their trust in Grainger and allowed them to focus on their area of expertise, patient care, while we took care of their MRO needs. Across all my visits, it’s clear that we continue to show up well for our customers. Based on what I’ve seen, while each industry dynamic is different, overall demand for MRO products has remained soft but generally steady to start the year. Inflation remains a talking point with customers and suppliers and is turning out to be stickier than we had originally anticipated heading into 2024. Dee will provide details in a bit. Moving on to our first quarter performance. You can see we started the year largely as expected, delivering another year solid – another quarter of solid results.
Total company sales were up 3.5% or 4.9% on a daily organic constant currency basis with positive contributions from both segments. In High-Touch Solutions, we continue to advance our five key growth engines as we leverage our technology and data assets to unlock further value for customers. Within the Endless Assortment business, we remain focused on acquiring new customers and improving repeat purchase rates across the segment, and we made solid progress here in the quarter. From a profitability standpoint, total company operating margin was down as anticipated to 15.8%, a decrease of 80 basis points over the prior year. EPS finished the quarter roughly flat versus prior year at $9.62. Beyond the P&L, ROIC remained strong at 42.9% and operating cash flow finished at record levels, which allowed us to return a total of $316 million to Grainger shareholders through dividends and share repurchases.
Lastly, I want to mention that yesterday, we announced a 10% increase to our quarterly dividend, marking the 53rd consecutive year of expected dividend increases, something we are very proud of. In addition, the Board refreshed our repurchase authorization, enabling the buyback of up to 5 million shares of common stock. These combined actions reflect our continued commitment to returning cash to shareholders through a balanced and return-focused approach. Overall, 2024 started off largely as expected, and the business continues to perform well. With this, we are reiterating our full year 2024 guidance. We are set up to have a strong year results for all stakeholders. I’ll now pass it to Dee to go through the details.
Deidra Merriwether: Thanks, D.G. On Slide 7, you can see the high-level results for the total company, including 4.9% growth on the daily organic constant currency basis. The quarter played out as anticipated despite tough comps, continued rebaselining of the Endless Assortment business and impact from holiday timing in the period. Operating margins were down 80 basis points year-over-year, the finished largely as expected in the quarter. Gross margins were lower by 50 basis points as we lapped outsized favorability in the prior year period, and SG&A delevered 30 basis points as we ramp demand-generating investments to drive long-term, profitable share gain. In total, we delivered diluted EPS for the quarter of $9.62, up $0.01 over the prior year period and in line with our expectations to start the year.
Moving on to segment-level results. The High-Touch Solutions segment continues to perform well with sales up 3.4% on a reported basis or 3.8% on a daily organic constant currency basis. Volume growth remained strong, which offset a slight contraction in price due to timing. All geographies saw growth in the period. In the first quarter, the U.S. continued to see strong growth with contractors, government and health care customers. This growth offsets slowing demand in other end markets, including manufacturing and commercial services as well as the impact from holiday timing. Overall, demand remained soft but largely unchanged over the last few quarters. For the segment, gross profit finished the quarter at 41.8%, improving sequentially but below normal seasonality amidst a more muted pricing backdrop.
On a year-over-year basis, gross margin was down 60 basis points primarily due to the timing of price/cost spread along with the lap of a 20 basis point onetime favorable freight adjustment in the prior year. These headwinds were partially offset by continued freight and supply chain efficiencies, which began in the first quarter of 2023 and are now fully normalized. While the quarter finished in line with our expectations on the gross margin in total, we were a little more price/cost negative than anticipated as the timing of price and cost is never perfect. As the year progresses, we expect price/cost spread will recover and finish the year closer to neutral. SG&A delevered 40 basis points as we continue to invest in our demand-generating growth engines, including marketing and store head count.
We will continue to stay disciplined with our spending and rigorous and understanding cause and effect, but feel it’s prudent to invest through the cycle to gain share over the long-term. Overall, these results position us well for another strong year within the High-Touch segment. Looking at market outgrowth on Slide 9. We estimate that the U.S. MRO market, including volume and price, grew in the quarter between 2% and 3%, nearly all from continued price inflation. This indicates that the High-Touch Solutions U.S. business achieved roughly 150 basis points of market outgrowth in the first quarter in total. Similar to last quarter, this more muted quarterly outgrowth reflects the higher PPI-based price inflation in Grainger’s first quarter price contribution.
As we mentioned in the past, there is no perfect market for our business, and we’re comparing a broader external metric of inflation to our MRO product mix. There can be noise, especially in quarterly periods. That being said, as D.G. alluded earlier, inflation has been stickier than we originally anticipated, and we’re taking some corrective actions in the second quarter to ensure we adhere to our two core pricing tenets, maintaining market relative prices while ensuring price/cost neutrality over time. Importantly, on a pure volume basis, we’re looking at our volume contributions versus the growth in industrial production. Our volume outgrowth is closer to 450 basis points, reflecting continued strong performance for our High-Touch growth engine.
Moving to our Endless Assortment segment. Sales increased 3.7% or 10% on a daily constant currency basis, which adjusts for the impact of the depreciated Japanese yen. Zoro U.S. was up 5.1%, while MonotaRO achieved 13.1% growth in local day’s local currency. At a business level, Zoro’s are continued strong growth from B2B customers who remained up year-over-year in the high single-digit. This helped offset continued declines with non-core B2C and B2C-light customers, which were down double digits year-over-year. We expect these B2C headwinds to subside as the year progresses. At MonotaRO, sales were strong from continued growth with enterprise customers, coupled with solid repeat purchase rates within their core B2B customer base. On a reported basis, however, these strong results are nearly all offset by continued foreign exchange rate pressures as the yen sinks to near all-time lows versus the dollar.
Operating margins for the segment declined 20 basis points to 7.9% largely driven by gross margin favorability at MonotaRO from freight and supply chain efficiencies, which were more than offset by negative mix at Zoro as gross margins continue to normalize following the last few years of inflation. Overall, it was a good quarter for the Endless Assortment business. Now an update on the remainder of the year. Overall, we said Q1 played out much as we expected, and results aligned well within the guidance ranges we laid out at the beginning of the year. This has continued into April with daily organic constant currency sales up 5.7% month-to-date. This gives us confidence to reiterate our current year – our current full year 2024 guidance, which includes daily organic constant currency sales growth between 4% and 7% and EPS ranging between $38 and $40.50, up roughly 7% at the midpoint.
On seasonality, top line comps get easier as we move through the year. Operating margin will dip down sequentially in the second quarter as gross margin moderated slightly, and SG&A leverage declines as merit increases go into effect and marketing investments continue to ramp. With that, we expect modest year-over-year EPS growth in the second quarter with earnings ramping from there in Q3 and Q4. Although we are maintaining our guidance ranges, I do want to call out the increasing headwind we’re seeing from foreign exchange rates. As it stands today, the dollar to yen spot rate sits roughly at 1.55, well above the 1.44 we originally planned in January and still assumed in our current guidance. If rates remain at these elevated levels, this would cause roughly $140 million incremental headwind to our full year 2024 reported net sales guidance at an approximate $0.13 decrease to annual EPS.
Overall, we’re pleased with how the business is performing and remain confident in holding expectations for the year. With that, I’ll pass it back to D.G.
Donald Macpherson: Thanks, Dee. Grainger’s ongoing success is made possible by our people. And I’m fortunate that I’m routinely able to spend time with our frontline team members. And it’s clear that they are deeply connected to our customers, working side by side to help solve their most challenging problems. I believe this commitment to our customers is because of the emphasis we put on building a culture where every team member knows that they can make a difference. Earlier this month, Grainger was named to Fortune’s Best Place – Workplaces in 2024 for the third consecutive year. This is an exclusive recognition that honors companies with the best cultures and people, which is a perfect way to describe what we have at Grainger.
I’m confident the team will continue to keep working towards our goals and delivering on the things that matter most for our customers, team members and all stakeholders in 2024 and beyond. With that, we will open the line for questions.
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